Chapter 2- Thinking like an Economist
- The ‘father’ of modern microeconomics
- Greatest contribution was seeing how markets function
- The ‘invisible hand’ notion
- All economic agents are motivated by greed rather than generosity….
– Consumers want the lowest possible price
– Producers want the highest possible price
– So how could the economic system work at all?
– Due to the forces of competition, everyone’s greed is channeled by the ‘invisible hand’ such that it
serves the common good.
• My greed is offset by your greed.
- Economics is supposed to be a social SCIENCE
- Social in that it deals with human behaviour
- Science in that there should be some method involved
• Draw up a conjecture that aims to explain some economic phenomenon
• Attempt to find evidence to PROVE it!
–In the context of law, this means building a case
• In economics, it often means gathering relevant data and carrying out EMPIRICAL validation
• All in all, you must leave yourself open to being proven wrong in order to be scientific
–That is called REFUTABILITY
Example of scientific economic research
– Proposition: increases in the minimum wage lead to decreases in employment, all other factors
• Warning: keep your mind open. It may or may not be true, so let’s be Dispassionate and appeal to
• One possible technique: Collect monthly data on the number of teenagers employed in each
province over a long interval
• Observe what happens when one province, like Ont., raises its minimum wage, while the other
provinces hold theirs fixed
• Carry out a before/after analysis: look for a greater drop in teenage employment in Ont. than in
the other provinces. If so, there is evidence that the minimum wage ‘kills jobs’
Example of unscientific ‘research’
– Proposition: increases in the minimum wage lead to decreases in employment, all other
factors held constant
• Warning: keep your mind closed. It is obviously true or false, so let’s be passionate and not waste
time by appealing to the evidence. Instead, rely on ideology and superstition • From the right: firms have to fire workers if the wage increases (otherwise they will go out of
• From the left: firms have to hire workers if the wage increases (because workers are spending
more, and hence firms are selling more)
Another example of unscientific ‘research’
– Proposition: The business entities acquired by Bain Capital are ‘exporting’ jobs to countries with
‘cheap labour’ in order to pad profits and undermine living standards of America’s middle class
• Warning: keep your mind closed. It is obviously true, so let’s be passionate and not waste time by
appealing to the evidence
• rely on anecdotes – here’s is ONE example
Assumptions and models
Both of these groups have a MODEL in their minds about how the labour market functions
– To be useful at all, the models have to omit a lot of detail, and thus they are generalised
- Any economic model good or bad, is based on unproven ASSUMPTIONS, from which subsequent
logical deductions are made
- They are designed to SIMPLIFY the model so that conjectures can be made
- Assumptions are usually unrealistic
The Production possibilities frontier (PPF) is our first economic model.
– also called A TRANSFORMATION CURVE.
Assume that the economy produces two goods, "guns and butter".
– A metaphor for social spendin